Take a hands on learning approach with a forex trading demo account
A forex trading demo account has countless uses for both beginner and seasoned traders, it allows for traders to experience trading first-hand and the best part: it doesn’t cost anything to get started!
Normally, in order to be able to trade with a regulated broker, you would need to register for an account, submit some form of identification documents to prove your identity and finally, make a deposit.
However, a forex demo trading account, which is typically available with all brokers; alleviates most of these requirements. Most of the time, you can skip the lengthy verification process i.e. proving your identity, since you will be trading with virtual money.
As soon as you register for a forex demo trading account and have your login details, you will be able to start trading right away – just not on live servers. The only downside to this, is that all trading will be simulated and even if your trades are successful, you won’t be making any actual profit. On the other hand, however, you aren’t risking of losing any of your hard-earned money either.
If you are a novice trader, you will need some time to familiarize yourself with the trading platform and how the market behaves during a trading session and this a demo trading account is the perfect environment to go about doing this.
It should also be noted, however, that even experienced traders often employ the use of a demo trading account in order to test their strategies and see how they perform with the spreads offered by their broker of choice.
The benefits and pitfalls of a forex trading demo account
Regardless if you are just starting out in the forex market, just want to see how trading is done without risking anything, or even if you to practice some market analysis and see how accurate you are; you can use a demo account to test your limits without any consequences and the best part is that it’s completely free of charge.
In fact, most seasoned traders, advise that you don’t transition to a live trading account unless you spent at least a few months testing your strategies on demo. If you are confident enough in your skills, you can make a deposit whenever your wish. Normally there is no time limit on how long you can trade on demo, and this means you use it indefinitely until you are ready to make the move to the big leagues.
While doing your research and educating yourself on what moves the markets is always useful, learning-by-doing is invaluable when it comes to trading.
As such, demo trading can impart answers to the following questions:
- Which instruments/markets should I trade?
- What is the most favorable time to trade each market?
- Which strategy is more effective for my trading style?
- Are my risk management methods adequate?
There isn’t a one-size-fits-all formula to succeeding in forex and the truth is that even if you hear about someone using a specific trading strategy profitably, it doesn’t mean that the same strategy would provide the same results for you.
Each trader is different, trades at different times and prefers trading different currencies for various different reasons. Therefore, you need to take the time to practice your trading skills in a variety of markets to find out which one makes more sense to you.
Some would argue that demo trading doesn’t impart the same benefits as trading live with real money, since there are no real stakes which translates to reckless trading and that’s true to some extent. When you are trading with virtual money, you won’t feel invested in the trade and as such, you won’t be hard pressed to make any hard decisions.
With real trading on a live account, mistakes can be costly, the stakes are high and it’s a highly stressful experience – especially for beginners. Keeping calm is much more difficult which can lead to becoming overcome by emotions like fear and anxiety, which can in turn lead to bad decisions such as not committing to your strategy, overtrading, or even not trading at all – missing out on favorable opportunities.
However, this issue can be avoided if you start trading with the mindset that you aren’t trading with virtual money and limit your trades to realistic amounts. Since demo accounts can start with an initial deposit starting from $5.000 to $50.000, it’s easy to get carried away with large positions and high-risk, high reward trades, but if you stop thinking that this is practice money and instead treat it as real money, you will have a much more challenging and realistic experience.
Differences between live and demo accounts
While a forex demo trading account is meant to mirror the performance of the live market, in reality, there are some aspects that make the experience somewhat unrealistic.
For example, even though this may not be the case for all forex brokers; the price feed and spreads offered by your broker on a demo account may actually be different than the ones available on a live account. This may prove problematic for high-frequency trading strategies such as scalping, as they focus on several, rapid, but short-lived trades per day with the goal of taking just a few pips of profit.
These strategies are effective when spreads are low because, eventually, the small amount of profits add up to substantial gains by the end of the day. However, if a broker’s spread pricing differs between their demo and live servers, a trader that follows a scalping strategy will likely not have the same success when trading live compared to the demo account.
Also, it’s quite common for some demo traders to think their strategy will be successful when transitioning to live trading, but soon after they realize that their stop-loss and profit targets aren’t executed correctly due to slippage.
Slippage usually occurs during highly volatile market conditions where prices are fluctuating too rapidly and there isn’t enough liquidity to execute orders on the requested prices. This is a common occurrence on the live market, but demo servers don’t always reflect such movements and demo traders will likely never experience slippage when they enter or exit the market.
If you are interested in learning how to trade forex with a reliable and regulated broker, open an account with CM Trading and enjoy a free e-book guide as well as a treasure trove of other educational resources and materials free of charge.
Register now to open your demo account today!